The Real Health-Care Debate

The real health-care debate isn’t whether we should have reform, but which type of reform to pursue: good reform versus bad reform. A senior economist explains how we can make high quality health-care available to all.

Senator Ted Kennedy of Massachusetts was keenly knowledgeable about health-care issues in the United States, closely associated with policy on the topic, and a major public figure. Given his stature and wealth, he could have gone to any country in the world for his health care, yet he chose to be treated in the United States. Here he received the best care in the world, and no one doubts that he was the central decision maker, in consultation with his doctors, about what treatments he wanted and received. The same would be true of Warren Buffet, Bill Gates, or President Obama.

Kennedy played the central role in his own care choices because he could pay for the services he received. Whether he was self-insured or carried outside insurance, the fact that those who treated him knew they would be paid through means at his disposal put him in charge of his health care.

Contrast this with an unknown taxpayer, admitted to a county public hospital or government-run clinic somewhere and added to the queue, perhaps just another Medicare or Medicaid patient with a life-threatening problem near the end of his life. Joe Taxpayer has been indirectly paying for his health care, too. Perhaps quite a bit. The difference is that he will not be the respected key component of the process and his experience will be quite different. If health care were conducted as it is in some countries, protocols for treatment of someone his age may even have denied him getting the treatment that Kennedy chose.

In America, the real health-care debate is whether Americans’ health care will look like Ted Kennedy’s or Joe Taxpayer’s. The issue, therefore, is not about reform or no reform. It is about good reform versus bad reform. How can every American’s health care look like Ted Kennedy’s? The answer is: “He who pays the piper, calls the tune.”

Imagine that every American has good health insurance, appropriate to his or her circumstances, and is the conduit through which payment is made. Imagine that doctors and hospitals post prices, can charge what they want but compete with one another for patients, and charge everyone who they do treat the same price for the same service on the same terms. Only then will every American be in charge of his or her own health care and be treated as the respected center of all decisions about their own bodies.

This system need not rest in the imagination. It’s possible in the here and now with just a few minor reforms. Here’s how:

Quality, affordable, good insurance will require that each “insurance generation” of American males and females pay for its own health care as a group year by year. For example, all males born in the year 1981 must pay for the health care that 1981-born males use in 2010—or in any other year. If we want the insurance to be good, it will cover all types of medical expenditures necessary for life and health while excluding optional procedures such as elective cosmetic surgery and hair transplants. Since it is insurance, everyone in the group will pay the same premiums for the insurance they buy. The deductibles plus co-insurance payments plus premiums of the 1981-born males pay for all of the care that the group gets. A handling charge that should be on the order of 12.5 percent of the premiums, possibly as little as 8 percent, depending on competition in the insurance market, goes to the insurance companies for doing the paperwork and claims processing. The system could be that simple.

Americans know that insurance companies can make money by collecting premiums and then not paying out on legitimate claims when they occur (which is illegal), or by utilization gate keeping (reviewing claims and denying some, which ought to be illegal), or by charging too much in premiums and investing the excess money in high-return investments.

Under a good reform, however, insurance companies would not make money in any of these ways that harm consumers. Instead, any 1981-born male could buy insurance from any company, at any time, pay the same premiums that any other 1981-born male pays for the same coverage, and have all of his medical expenditures except optional elective procedures covered. The insurance company’s role would simply be to verify that the medical event occurred, the service was provided, the service was on the list of covered services, and that the insured paid his deductible or co-insurance portion. In other words, there would be no utilization gatekeeping by law, and everyone’s insurance would be guaranteed issue, guaranteed renewable, portable, personal, and responsive.

Under this plan, insurance-company earnings would be based solely on payments to them for claims processing and paperwork. Because total medical expenditures for 1981-born males is known with certainty, or near certainty, a national re-insurance pool (insurance for insurance companies) could make transfers to insurance companies whose group of 1981-born males spent more than the group average, and receive transfers from companies whose group of 1981-born males spent less. Companies would compete with one another on the quality of their service, their friendliness, the speediness of their claims processing. They would earn no money from advantageous selection (“cream skimming,” issuing policies to an intentionally gathered healthier-than-average collection of insureds) or face threat of bankruptcy from adverse selection (issuing policies to an unintentionally gathered sicker-than-average collection of insured individuals). In other words, insurance would function as it should—just as described in textbooks.

You can’t make something cheaper to buy than it actually costs. But because the 1981-born males are today 28 years old, and the insurance companies that compete for their business will cut premiums to the least possible, the insurance just described will be priced at the least possible charge. As the 1981-born males age, they should expect that their health insurance premiums will rise, just as life insurance premiums rise. If a 1981 male wants to flatten his premium profile, he does so through savings that will go toward higher premiums later in life. Since anyone can save, the option of making insurance less costly later in life is available to all.

Finally, what about seniors who have not saved enough for their medical insurance premiums and no longer have the savings option? They can apply for charity, first from foundations and private sources that government can oversee, encourage, and help process payments from, perhaps through check-off boxes on federal tax returns. If these sources are not enough they can apply for government welfare payments financed through taxes.

The arrangements just described would take relatively few pages of federal legislation. A national re-insurance body would need to be formed. Utilization gate-keeping would need to be prohibited. A basic insurance policy would need to be defined, and motivation created to cause individuals to want to buy it. But presuming these are done, insurance would be actuarially fair, adverse selection and advantageous selection eliminated, guaranteed issue and guaranteed renewability would apply, and every American would be able to buy affordable insurance with targeted charity provided to those who needed money to buy their coverage.

Much of this has been described in my recently co-authored book Health Care for Us All: Getting More for Our Investment (Cambridge University Press, 2009). James Henderson and I estimate that the uninsured could all be covered at a national annual cost of about $1,555 each. Because each insurance generation covers its own health care costs, the arrangements would be sustainable, laterally expandable in a generation, longitudinally expandable across generations, and fiscally sound. No entitlement or threat to future generations would be created. On a national basis, having everyone covered with good insurance would cost less than one-half of one percent of national income. Savings through other easy-to-make changes would be on the order of 2.25 percent of income. In total the changes would appear to be free.

If good insurance is available and everyone has the income to buy it, there must be a strong motivation to do so. Part of the increased motivation derives from the lower insurance prices that will prevail for those under age 34, who account for nearly 60 percent of the uninsured. Additional motivation can be provided in different ways, but one that economic theory points to requires no budget outlay and takes the form of a carrot rather than a stick. If the general price level reflects a uniform tax such as a value added tax, anyone with health insurance can be rewarded with lower prices for all purchases by rebating the tax or not collecting it at the point of purchase. No budget outlay is needed to create the motivation and everyone with health insurance pays less for their food, clothing, transportation, and so on. We believe that a 20-percent reduction would motivate nearly everyone to buy health insurance.

In sum, a short bill that provided for good insurance, targeted income aid to those who needed it, and provided a positive motivation to buy insurance would need only a few pro-competitive features more to have government act as referee to keep competition in health care and health insurance markets strong. Prices would have to be posted, most favored customer pricing guaranteed by law (charging the same price to users of identical services), and certain protections for users of insurance such as providing by law that an individual has the right to take money spent by his employer on his behalf for health insurance and use it in the private insurance market if that results in a better outcome for him. All could be accomplished in a targeted intervention with little change for the 85 percent of us who have good insurance and good health care now.

But Senator Baucus has other ideas. He wants instead to spend over $829 billion over the next ten years ($3,900 per uninsured restored to coverage), more in years after that, while creating an unsustainable entitlement and leaving 25 million uninsured. He would make government the center of health care instead of empowering the patient.

Senator Baucus, like most of his committee, does not understand good health insurance or how to make it affordable. Not surprisingly, he seeks to place himself and Congress at the center of health care decisions in America. His proposal includes the words “establish” or “create” 312 times (as in “establish a new Federal commission called the Medicaid and CHIP Payment and Access Commission” or “establish the Medicaid Quality Measurement Program”). Congress will not be a referee, but the main player on the field. Because his plan’s bad features are scheduled to phase in after 2012 so as not to harm Mr. Obama’s next election, this may not be known to the American public until it is too late.

If we aspire to Ted Kennedy-quality health-care for all, then should we restructure health care to empower patients and have government act as referee or should we empower the government to create new entitlements? The real health care debate is over which of these is the best approach.

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